Investment and Industrial Policy: Essential for Inclusive and Sustainable Development

Interview with Juan Carlos Moreno-Brid, professor at the School of Economics at UNAM

By: Guillermo Máynez Gil

Investment and Industrial Policy: Essential for Inclusive and Sustainable Development
Growth driven by the increase in the gross value of exports is not enough to promote balanced development and generate decent jobs. This is demonstrated by the evolution of the Mexican economy in recent decades. To overcome lags and face the challenges of climate change and the digital revolution, a framework of policies—industrial, fiscal, and financing—that channels sufficient public and private investments is necessary to strengthen production and technological capacities, increase the national content of exports, and strengthen internal production chains. This is what Juan Carlos Moreno-Brid suggests in this interview.

What is the general outlook of the country’s industry one year after the lockdown decreed by health authorities?

It’s quite sad, like the economy in general. Two distinctions must be made: between the export industry and the domestic market-oriented industry, on the one hand, and between the short and long-term, on the other. In the former—largely due to the countercyclical fiscal policies implemented in the United States—Mexican exports registered a significant rebound, several industries and products are already at pre-crisis level and, given external demand, they face a favorable scenario. The outlook of the industry focused on the domestic market, however, looks gloomy and a recovery is not expected anytime soon.

In a broader view, the industry will face somber times due to the long-standing structural problems and a very damaged domestic market with a mediocre long-term growth rate. At an aggregate level, this outlook is positive for the export sector and adverse for the rest—a worrying balance. Recent figures report a decline in manufacturing production in 17 of the last 18 months. Without a change in the development agenda, the industry and the Mexican economy as a whole will continue—as they have done for decades—with an export led growth. Projections suggest that, in the absence of an industrial development policy, we will continue to be mired in the trap of slow long-term growth.

 

From a sector perspective, what activities have been most affected by lockdown and which ones are doing better?

According to data recently published by INEGI (National Institute of Statistics and Geography), some primary sector branches are doing much better and, in the economy as a whole, 35% of the branches of economic activity already boast pre-pandemic levels or higher. Among the latter, some sectors stand out, namely computer and communication equipment, electrical appliances, metal, food, and paper products. In contrast, among the hardest hit branches include apparel and leather.

Regarding the speed of the rebound, we expect to see, in annualized comparisons, high expansion rates in months to come, especially due to the arithmetic effect of comparing these with the months of 2020 in which economic activity collapsed due to lockdown. The long-term challenge will be the expansion rates of manufacturing with the pandemic—let’s say—under control. Therein lies my great concern: without investment, manufacturing will not have dynamism. The current administration has not removed the usual obstacles to private—and public—investment, some have even worsened. The business climate is far from showing signs that predict an investment takeoff. This gives the impression that past government mistakes are being repeated by not implementing an active industrial policy or by continuing to see the USMCA as a sufficient lever, if not the only one, for development. It insists on considering exports as the practically exclusive engine of growth, without paying attention to internal linkages, the creation of decent employment, and innovation. That’s not how it works.

We have lowered our expectations tremendously: from the 7% that former president Fox promised to the “hope” of recovering a pre-pandemic growth rate of a little more than 2% annually. That is disgraceful and it must change. There is an urgent need for a national agenda that promotes robust and sustainable development—industrial and economic.

 

What form will the recovery take among exporting companies? Will it be different from that of the companies that serve the domestic market? Is there a risk that the heterogeneity that characterizes the country’s industrial fabric will increase?

That risk is a reality. Our manufacturing fabric suffers from immense duality. Companies focused on the domestic market are going through a very rough patch and their long-term outlook is not encouraging.

The purchasing power of 80% of the Mexican population is very low, it suffers from great inequalities and worrying rates of working poverty, as well as a very wide gap between unemployed, underemployed, and available. The pandemic and the recession aggravated the structurally-rooted job insecurity, in a context in which—for reasons that I believe are largely ideological—the government has refused to face the serious situation with an expansive fiscal policy. Its relentless insistence on austerity, without recourse to a tax or debt reform, makes it one of the governments in the world that has channeled the least fiscal support to companies and families. Mexico is perhaps the only country in Latin America that in the middle of the pandemic has registered a surplus in its primary fiscal balance, both in 2019 and 2020.

 

The Mexican export model has yet to increase national content levels. What specific measures would you recommend to integrate a greater number of Mexican suppliers into global value chains?

Investment, strongly supported by development banks. Without it, nothing can be achieved. A virtuous production transformation that diversifies our export basket and increases its national content, and promotes the competitiveness of companies focused on the domestic market, requires large amounts of investment—public and private—led by an active industrial policy, and in concert with relevant economic, social, and political actors. The USMCA and the accelerated rebound in the United States economy are not enough to lift Mexico’s economy out of the slow-growth trap in which it has been stuck in for decades.

Several Asian countries achieved high and persistent economic growth, marked by great export dynamism. By reconverting its production matrix and its export basket, they removed the restriction on the balance of payments to long-term growth. The role of the public sector was key, its ambitious policies for production and financial development were supported by development banks—or policy banks. It is important to contrast that route with the one that Mexico has followed. This structural transformation has been attempted here through trade and financial openness, and the dismantling of industrial policy. The notable exceptions were the ALTEX and PITEX maquila programs, which fundamentally promote an increase in the gross export value, but not in the content that is added in Mexico. This dynamic, together with the progressive appreciation of the real exchange rate, led many Mexican entrepreneurs to substitute domestic raw materials for foreign ones. Instead of being actors in an industry of transformation, some great leaders of the local industry became maquilas.

There is no one-size-fits-all solution to increasing the integration of national value in the export industry and further diversifying its supply. However, it is impossible to achieve this without a strategy committed to innovation—which both companies and government have systematically neglected. Likewise, in order to stimulate the industry focused on the domestic market, reducing the high concentration of income soon and significantly is necessary. ECLAC recommends “growing to equalize and equalizing to grow.” A population affected by economic vulnerability and poverty cannot be a demand engine used to trigger industrial investments. Industrial development policy must be accompanied by income redistribution policies.

 

Among the production activities and sectors with the greatest future projection, which ones should be targeted first in the creation of an industrial policy for 21st century Mexico?

Perhaps the route is not to choose strategic sectors a priori, but rather to identify priority areas, challenges or national problems, whose solution could contribute to the adequate development of the industrial and production structure. A current and very painful example is the shortage of vaccine vials, oxygen tanks or medical and protective equipment, and even the production of vaccines. These are major flaws in our industrial supply that translate into a large number of premature deaths, infections, and diseases. One of the lessons learned during the pandemic is that we urgently need an industrial policy that contributes to building solutions to the challenges facing public health, perhaps starting with water management.

As a society, the first thing we must do is ask ourselves what priority missions of national scope we have ahead of us, how the industry could and should participate to achieve them. In this endeavor, another mission—or lag—that the pandemic reminded us about with blood, sweat, and tears is the preservation of natural resources that we will pass on to generations to come.

Hence the importance of promoting a clean industry committed to sustainability. Everything that has to do with green industry, like renewable energy, sustainable transport, it should all be a priority. The great demand is there for green businesses and to speed up the energy transition towards renewable energy sources. Transportation will stop depending on hydrocarbons soon.

ECLAC estimates that the activities that can lay the foundation for a new industrial development platform are: 1) ones with “Keynesian efficiency,” with a high and growing demand in world markets; 2) ones with “Schumpeterian efficiency,” characterized by innovation and increasing returns to scale; and 3) ones with “Hirschmann efficiency,” that is, with strong backward and forward linkages to combat the disconnection that characterizes the country’s industrial fabric.

 

In addition to industries such as aerospace and software, what other cases of present or future success do you see in Mexico?

Instead of mentioning other cases, I want to highlight that these success stories are based on agreements between investors, state and municipal governments, workers and, in part, the academic sector as well.

 

Another unwanted trait of our export model is specialization in labor-intensive activities with little added value. Are we still a predominantly maquila country?

There has been progress in that respect, but there is still a lot of room for improvement. My particular interest in investment not only involves expanding our production capacity but, notably, modernizing machinery and equipment in companies, changing their production processes and incorporating more national materials. As for private investment, it will be key to apply the incentives available to its promotion and innovation, taking into account the commitments acquired in the USMCA and other international instruments.That said, having a dynamic and internationally competitive industry requires having world-class infrastructure and an adequate regulatory framework, based on the rule of law. This implies resolving the government’s budgetary limitations that, in the absence of a profound tax reform, have been addressed—but not resolved—by cutting spending on public investment. Without a tax reform, this trend of cutting public investment—apart from very specific projects like the train, the refinery, and the airport—will continue. There’s practically nothing left for other projects. Additionally, there’s the restriction on loans that, with the exception of housing, is worsening as of February. Development banking is still not playing the important role that it should play in all production transformation strategies, to say the least.

 

What type of horizontal or vertical incentives should the State use to ensure that Mexico specializes in the goods and services, and the phases of the production process that contribute the most to long-term economic growth and development?

There are essential horizontal incentives, such as the need for first-world infrastructure, for example, in telecommunications and networks. However, policies—so to speak—that are exclusively horizontal don’t have the power to trigger a profound reconversion of the production apparatus. On their own, slogans like “level the playing field” or “make processes easier” tend to be irrelevant. Agreements based on a concerted vision of development must be put into operation, and vertical intervention and stimulus agendas that remove the fundamental obstacles to development and promote the growth of the Mexican economy must be implemented. This is what I have proposed and it has also been expressed by UNCTAD, ECLAC, and economists such as Mariana Mazzucato or Ha-Joon Chang, among others.

 

What would be the most relevant aspects of a new industrial policy and what would be the main differences with respect to the policies applied in the recent past in Mexico?

We cannot violate the rules of international agreements that we have signed, but we can undertake special regional development initiatives and make use of public investment. Likewise, we have the potential of and urgency for environmental innovation, which is seen as a pillar that should set the tone of the industrial, transport, and energy policy: a reengineering to decarbonize the production sector would generate a lot of investment and employment that, if accompanied by income redistribution policies, would incorporate those who have been marginalized from economic development. However, without a new national development agenda committed to creating decent jobs and in which industry plays a central role, I find it somewhat useless to talk about the details of an industrial policy.

 

What would you suggest is needed to democratize the digital leap of Mexican companies in the manufacturing sector (another great challenge the country is facing)?

A lot of money must be invested if by “democratizing” we understand that everyone has access to digitization, but the most difficult thing is to change mentalities, to understand the need to do different things or to do them differently. Globalization challenges can be addressed dynamically only with authentic competitiveness based on innovation. Taking this into account, digitization opens up a double challenge. First, having the resources—micro and macro—to implement it on the scale necessary for the company not only to survive, but to compete more and better in national and world markets. Second, it is linked to two crucial questions. What will be the impact of digitization on the net absorption or expulsion of workforce? How will the capital-labor ratio and the labor relations in companies or their institutional framework in general be modified? Today we are seeing a recovery in employment, but it’s extremely precarious. So democratization does not occur only with expanding access to technology, it also needs a strategy to absorb redundant workers. An industrial digitization policy without a thorough review of social policy would be a disaster.

 

Do initiatives—like the one President Biden proposes on infrastructure—indicate that there is a change in the conventional view on industrial policy?

Absolutely. Not only in industrial policy, but in the role of the public sector in the economy. Roosevelt is once again a reference in the White House, I wish it were here too. By the way, in the 2009 crisis—and in fact, always—there was an industrial policy in the United States even at the micro level, intervening directly, for example, in automotive and bank plans. The United States never adopted the “best industrial policy is no industrial policy” paradigm.

 

What possible scenarios do you see for the country’s industrial activity? Are you optimistic or pessimistic about the future of the industry in Mexico?

Optimistic if we talk about activity levels, because they are recovering. I am very pessimistic if we talk about the quality of the recovery in terms of the type of jobs, the transformation of the production structure, and its long-term growth rate. I’m not just talking about the pandemic, but the kind of development strategy put into practice. If we continue doing the same as before, there is no way Mexico will get out of the stagnation, inequality, and poverty it has been mired in for a long time.